The U.S. Experience with Fiscal Stimulus

April 25, 2012

The Obama administration's American Recovery and Reinvestment Act (ARRA), better known as the "stimulus" package, reinvigorated the national debate regarding stimulus spending and its impacts. Do such fiscal measures truly mitigate the negative effects of recession? And if so, is it worth the cost?

Researchers at the Mercatus Center sought an answer to these questions by performing a comprehensive economic analysis of all stimulus spending efforts in the United States since World War II. They looked to the 10 recessions that have occurred in the last 60 years, accounted for presidential and congressional efforts to respond to the recession, and assessed the results of the policy.

The most important metric within stimulus spending is the fiscal multiplier -- the change in gross domestic product (GDP) per dollar of fiscal spending.

Historical analysis found that multipliers ranged from negative values (meaning that stimulus spending actually hurt growth) to a high of 2.0.

Crucial is that the effectiveness of stimulus depends largely on the target for spending: investment in infrastructure saw a multiplier of 1.3, while stimulus for transfer payments saw a multiplier of 0.2 (for every $5 of stimulus spending, GDP increased by $1).

Also, of particular relevance to the recent stimulus is that debt-financed stimulus saw multipliers that were, on average, 50 percent lower.

It bears mentioning that analysis of stimulus packages faces a number of challenges that limit its accuracy and contribute to uncertainty.

There is almost always a time lag between the occurrence of the recession-causing event, the creation of stimulus policies in Washington, and the implementation of those policies.

Stimulus efforts can be compounded or confounded by monetary efforts that are often difficult to take into account, either because their impact is unknown or the policies are not public.

Finally, rational citizens may respond to different stimulus efforts in different ways, depending on their perception of its permanency.

Nevertheless, aggregate economic assessment suggests that, even with generous assumptions, the cost to the federal government to provide jobs via stimulus results in a net loss.